Income tax

Nothing is certain in life other than death and taxes. Income tax is the one of the main burdens we all have to bear.

The basics

You have to pay tax on income from your job, profits from self-employment, interest on savings and dividends from investments, profits from letting your property, pensions, and some state benefits, including jobseekers' allowance.

Gifts are free of income tax, as are gambling winnings. Profits from selling investments do not count for income tax, but may be liable for capital gains tax.

Allowances

Everyone is allowed a certain amount of income before they have to pay tax - see the tax tables link below. Non-taxpayers should ensure the interest they earn on their savings is not automatically taxed. They can arrange to have the interest paid tax free by completing form IR85, which is available from banks and building societies.

Tax bands

The first tax band is 10%. The next bands are basic (20%) and top-rate (40%) but now a new 50% super-taxhas been proposed for 2010. You will pay higher rate tax of 40% on the amount you earn over the limit.

Deductions

If you are employed, tax will be deducted from your pay via pay-as-you-earn (PAYE) before you receive it. Your tax code, which is worked out by HM Revenue & Customs, determines how much tax you will pay.

The self-employed, and those with income from extra earnings, will usually be required to complete a self-assessment tax return.

Tax on savings

Interest paid on your savings accounts is taxed at 20% for basic rate taxpayers and 40% for higher rate taxpayers. Unless you formally apply to be in the 10% band, interest is paid with 20% tax deducted, and higher rate taxpayers must make up the difference.

Offshore income

If you have interest from an offshore bank account that is paid with no tax deducted, you must declare this. If it is not declared, it is deemed a criminal offence.

Pensions

Pensions are taxable once you earn more than the age-related personal allowance, which means that most pensioners with a company pension as well as the State pension find themselves paying income tax.

Tax on perks

If you enjoy certain benefits such as free health care at work, these are treated as extra pay and you will have to pay tax on them. It is a legal requirement for your company to tell the taxman about these benefits.

Updated April 2009, Philip Scott

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